March 16, 2023

The misdirection and blame-shifting is in full swing over at the honorable Senate after Republicans and some Democrats (hello, Kyrsten!) are moving faster than Irish step dancers. Via HuffPost:

“Where were the regulators?” Sen John Kennedy (R-La.) said on the Senate floor. “This whole debacle could have been avoided if the regulators had just done their job and stepped in and said, ‘Silicon Valley Bank, what you’re doing is dumb, and you can’t do it anymore.’”

Kennedy omitted a key detail from his remarks. He and the other members of the Senate Banking Committee — including several of the panel’s Democrats — wrote a bill in 2018 that told regulators they could relax their scrutiny of institutions like Silicon Valley Bank. (BuzzFeed, HuffPost’s parent company, banked with SVB.)

The Dodd-Frank Wall Street Reform bill Congress passed after the 2008 financial crisis imposed special oversight rules on banks with more than $50 billion in assets. Ten years later, at the behest of the regional banking industry, the bipartisan bank bill raised the threshold for those prudential standards so that they were only mandatory for banks with $250 billion in assets.

The Congressional Budget Office and some banking experts warned the bill would increase the risk of a financial crisis. The CBO specifically warned that the bill increased the risk that a mid-sized financial institution would fail. And that is what happened in the case of Silicon Valley bank.

Republicans made certain types of oversight and reporting optional, and now they're complaining that regulators didn't use the option. (For some reason, I keep thinking of "relaxed fit" jeans. "Eat all you want, your jeans will still fit!")

Silicon Valley Bank failed and was taken over by federal regulators this week after depositors began withdrawing their money in a panic and the bank lacked the liquidity — assets that are easy to convert to cash — to continue honoring the withdrawal requests. The federal government then stepped in to guarantee the deposits, a dramatic move designed to prevent the panic from spreading to other banks.

But this kind of intervention — which Kennedy and others derided as a “bailout” of Silicon Valley’s fancy customers — was not supposed to be necessary. The enhanced prudential standards under Dodd-Frank include liquidity requirements that would have automatically covered Silicon Valley Bank if Congress hadn’t relaxed the law in 2018.

“It would have had to report it to regulators monthly, and the signs would have been caught earlier,” Mike Konczal, an economist and director of the Roosevelt Institute’s macroeconomic analysis team, told HuffPost.

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